How does new home building support affordability?

There has been one question that has risen above all others in the past few months: How does the government and the housing industry make homeownership an affordable dream for all Australians? In the beating heart of the property market, Sydney, buyers will likely be thinking much the same thing. In its April 7 board meeting, the Reserve Bank of Australia echoed what it is has been saying for many months – house prices in the New South Wales capital are soaring far above those in other cities.

Figures from SQM Research show that over the month to April 14, weekly asking prices in the Harbour City have skyrocketed 3.8 per cent. Investors continue to hail the city as their golden goose, but the rising prices bring up a number of other issues. Namely, how will the city provide enough houses to keep the momentum going without first home buyers falling off the price wagon? Fortunately, these could be a bright light on the horizon.

How will construction support affordability?

The Property Council of Australia has analysed new building activity data from the Australian Bureau of Statistics (ABS) and identified some positive trends. The building industry looked to have a resurgent 2014 across the country, with the number of new homes undergoing construction soaring to a record high level. Executive Director of Residential Nick Proud said building work started on 45,000 new homes over the year to December 2014, on top of the 153,000 homes on average that have been built yearly over past 10 years.

The number of new home starts surged 17.9 per cent over 2014, reaching an impressive 197,972 residential commencements for the year in seasonally adjusted terms. This holds some great promise for homebuyers across the country and for the Sydney market, this encouraging result will likely help put a dent in the predicted housing deficit.

“The more new homes we get onto the market, the more the pressure will come off house prices,” Mr Proud said in a April 15 statement.

What is the relationship between building work and approvals?

Homebuyers are usually inundated with facts and figures but it can sometimes be difficult to tell the wood from the trees. The relationship between building approval figures and dwelling starts is just one example. Basically, an approval is the application to build a new home, while home starts are properties that have begun construction. For one reason or another, there can sometimes be a gap between properties approved and those that are actually built.

Senior Research Analyst at CoreLogic Cameron Kusher said that this has been a feature of the property market over the past 30 years. By comparing approval figures and commencement data, Mr Kusher found that over 96.5 per cent of house approvals and 96.2 per cent of unit approvals have progressed to the building phase. The research showed that houses are much more likely to be completed than unit properties. Just 5 per cent of detached homes fall short of completion according to Mr Kusher’s estimation, while around 15 per cent of apartments do not reach the finish line.

In the past five years this relationship has become a lot stronger for houses in particular. Of the houses approved for construction, 98.1 have started – and, more encouragingly, 96.7 per cent have been seen through to the final stage. Units have lagged behind, with 85.1 per cent of approved apartments being finished.

“While the data indicates a lag of three quarters from approval to completion the reality is higher density unit construction takes significantly longer to complete often a number of years,” Mr Kusher said in an April 17 blog post.

Given the record number of approvals recorded in both January and February this year, the property market could receive a sizeable boost if they are translated into starts – and homebuyers could find a few more affordable options to choose from.